Lessons Taught by the Courts

This month, the Journal introduces a new quarterly department that offers practical discussions important liability concerns for CPAs. Lawrence A. Wojcik, JD, CPA, a partner the law firm Keck, Mahin & Cate, 77 West Wacker Drive, 49th floor, Chicago, Illinois 60601, describes several court decisions that provide new incentives for practitioners to become the historians their relationships with clients. This article is not intended to provide legal advice on specific matters and readers are encouraged to consult their own legal counsel. Comments may be directed to Laurrence Wojcik at (312) 634-5110. Although large-scale securities fraud schemes make the news, it's the garden-variety embezzlement cases that continue to haunt most firms. Whether they provide audit, review, compilation or monthly bookkeeping services, CPAs still face claims from their clients when a bookkeeper's defalcations are uncovered. WHO'S MINDING THE STORE? Last year, Maryland's highest court dealt with a typical embezzlement case. Wegad v. Howard Street Jewelers (326 Md. 409, [Md. 1992]) involved a malpractice claim brought by the jeweler against its CPA for his failure in a nonaudit engagement to detect embezzlement by the store's cashier. jury found the jeweler contributorily negligent in causing the loss, thus the accountant prevailed, but the decision was reversed on appeal. (See Legal Scene, JofA, Mar.93, page 21.) CPA appealed to Maryland's court appeals, the state's highest court, which reinstated the jury verdict in the CPA's favor. court specifically pointed out that although in some cases aecountants might be engaged for the very purpose detecting possible defalcations, there were other cases in which their engagement was more limited and did not necessarily include searching for misappropriations. court found the scope a CPA's undertaking had a direct bearing on how much reliance a client could place on his or her advice. The client, according to the court, not be permitted an...unqualified right to rely on the accountant's advice and thereby be completely insulated from responsibility for his or her own shortcomings. For example, we do not believe...an accountant's negligent failure to report shortages completely insulates the client who consistently leaves the company's cash...fully accessible to all employees and customers. In its opinion, the Maryland high court cited the CPA's engagement letter, which warned that the engagement couldn't be relied on to detect fraud, defalcation or other irregularities. letter specified only that the CPA would inform the business of any matters that come to our attention [that] cause us to believe...the information furnished us is not correct. court found that under these circumstances, a client might be less justified in relying on a CPA than when he or she was engaged, for example, to perform a fraud audit to protect the possibility embezzlement. In addition to the engagement letter, the court cited the CPA's testimony that he told the store owners at two yearly meetings that employees might be stealing from the business. Although the court acknowledged the CPA might have failed to report suspicious discrepancies in the store's books and records, it held such a failure was not sufficient to excuse the store owners from looking out for their own interests. The fact that an accountant has not discovered or disclosed employee theft does not completely excuse the employer from taking reasonable measures and exercising reasonable vigilance to prevent theft, it said. Wegad teaches important lessons. It underscores the need for engagement letters. reference to the engagement letter demonstrates how a court can attach great legal significance to a CPA's disclaimer any responsibility to detect fraud. Accordingly, statements that the CPA's services are not designed and cannot be relied on to disclose fraud, defalcations or other irregularities should be inserted in all engagement letters. …